by Gary Friedman, CEO of luxury retailer RH, appears to do just that with earnings call comments that have Wall Street (and the furniture industry) talking
Should we applaud RH’s Gary Friedman for bracing honesty with respect to global challenges to the U.S. home furnishings market? Should we head to the lifeboats knowing that after having navigated the ice field that was Covid, we now espy a Russia-Ukraine iceberg off the starboard side? Is Friedman, RH’s CEO, a preternaturally gifted prognosticator when it comes to inflation and consumer demand for home furnishings? Or did he just graduate from the Elon Musk School of Rhetoric, applying all he learned to his company’s latest quarterly earnings call?
These are just some of the questions blowing up social feeds and email inboxes after Friedman’s call on March 29, when he, among other rhetorical moves, quoted the movie The Big Short, questioned Treasury Secretary Janet Yellen’s awareness of challenges facing globally sourced companies, and preceded scaring the living daylights out of consumers everywhere with the proviso, “I don’t want to scare anyone.” About the only thing he didn’t do was go to Twitter to ask his followers whether he should sell off 10% of his RH stock, a la Musk in November, a move that cost Tesla about $30 billion in market value.
With its subsidiaries, RH, formerly Restoration Hardware, sells furniture, lighting, textiles, bathware, decor, outdoor and garden, and child and teen furnishings, selling through retail stores, catalogs, and online through RH.com, rhbabyandchild.com, rhteen.com, and rhmodern.com, as well as waterworks.com.
The cast of history
History might prove Friedman correct — that another recession is on the way and that inflation will “outrun” consumers fighting to keep pace with rising prices on everything, including and especially housing, gas, cars and food. On the heels of Covid but with war raging in Ukraine, U.S. home furnishings concerns have two stark choices: Raise prices or cut costs. The most recent round of trans-oceanic freight shipping contracts point heavily to raising prices.
The balm of being right historically won’t help the pain now. RH’s market cap plunged nearly 9% the week of Friedman’s call, the worst week for the NYSE’s 18th largest retailer in 19 months, or since Covid’s long-term effects on consumer demand and supply chain issues first started becoming clear in September 2020. The stock sunk more than 12% by mid-day on Wednesday, the day after the call.
Telling is RH’s stock volatility, or highest price minus lowest price, which was 2.3 times its average weekly volatility. With stock volatility at 30%, RH’s stock looked like crypto valuations, which is not a good look for a durable goods retailer. And RH share volume jumped to nearly five times the average for any one week.
RH finished the month in the bottom 3% of NYSE stocks for the month.
The question
It’s this volatility Friedman seemed to prophesy during the call, going so far as to quote the scene from The Big Short. You might recall that the film, which stars Christian Bale and Brad Pitt, dramatizes the collapse of the subprime mortgage market, an event that precipitated the Great Recession in 2008. Here’s the full quote from the call:
“There’s the scene in The Big Short where everybody is in that ballroom and the guy thinks it’s the guy from Bear Stearns or someone is up there . . . and he’s saying how they are going to buy back $1 billion of their stock . . . and then one guy on his BlackBerry, goes, ‘Can I ask the question, sir? In the 20 minutes that you’ve been talking, your stock is down like 55%. And everybody ran out of the room. I just think . . . we tend to just try to be transparent and honest. And look, maybe our stock is going to take a big hit because of this and people are going to think Gary Friedman wasn’t excited. I’ve never . . . I’ve never been in my 22 years here, I’ve never been more excited. I’ve also never been more uncertain.”
If there was a theme to the extraordinary earnings call, it would have to be uncertainty. Later in the call, Friedman seemingly gave his own company this advice: “I think you got to prepare for war. I mean if you’re going into a very difficult, unpredictable time, you just got to be super flexible, you’ve got to be able to improvise, adapt, overcome and kind of be ready for anything.” More Patton, less Putin.
Having just signed off on container contracts that, for the shippers, showed what “looked like a nice increase,” in Friedman’s description, RH now has to figure out how to absorb, pass along, or combine of these measures to rationalize those new contracts, which come just two years removed from per container shipping costs doubling to $4,800. That’s real money gone with no added value in return.
“If the war in Ukraine ends and inflation slows down some miraculous way, I don’t know, everybody can sign new freight contracts because, I mean, most of the world all signed new freight contracts,” he said.
Hearing this, and knowing how much volume Ashley puts on the water from Asia, I couldn’t help but think of Ashley’s recent letter to its customers that it was lowering prices. Signed by Todd Wanek, the letter admitted to the company not knowing yet how it would absorb the costs that going forward will not be covered by price increases, but that the company was committed to doing it.
Companies are “preparing for war” in different ways, in other words, and uncertainty would seem to be the constant.
Persistent inflation coinciding with the Fed’s move to bump the interest rate back up to 2%, geopolitical tensions and fallout from Russia’s aggression, and continuing logistics questions made Friedman’s guidance on earnings, “probably one of the most difficult . . . since 2008 and ’09, because we-we’re right in the middle of this disruption from Ukraine and Russia.”
If you’re going to predict, predict often
Friedman’s comments specific to Ukraine are getting a great deal of attention on Wall Street and elsewhere because RH is one of the last NYSE companies to report quarterlies, giving the CEO more sales data to go on in appraising the Russian invasion’s potential impact on consumer demand. Industry wide, that demand has been healthy, leaving us all to wonder what Friedman knows that we do not.
“We have experienced softening demand in the first quarter that coincided with Russia’s invasion of Ukraine in late February and the market volatility that followed,” he said on the call. “We believe it is prudent to remain conservative until demand trends return to normal.”
The Internet being the engine of theory and speculation that it is, at least one market watcher wondered whether Friedman might be using the smoke and dust of global uncertainty to mask or at least distract from what could be problems more specific to RH, a speculation also applied to Bed Bath & Beyond last summer and to Wayfair late last year. Let the air out of the stock now in order to build that value back over time, only with lower share price expectations, this theory goes.
Early in the call, Friedman said that while he can’t predict economic outcomes on a macro scale, “we do have the business model, strategy and balance sheet to take advantage of opportunities that may present themselves whether it be during times of economic expansion, contraction or dislocation.”
Uncertainty abides.
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